November 27, 2008

Cost cutting versus value for money

Dave Hill has put a link to my post today on promoting London on his 'London Blog'' on the Guardian website. This led to comments by those defending cutting the marketing budgets for London which can be read in full there.

I reproduce here the reply I posted because it deals not only with tourism but with the confusion between 'cost cutting' and 'value for money', which are two quite different things, which are at the root of serious errors both by the present administration of London and by those who defend such policies.

'The arguments of CJCJC and domprague [commenters on Dave Hill's blog] show just what is wrong with those who support Boris Johnsons policies in this area and why they lose so much money for London. They don't understand the difference between ‘value for money, which is always a good thing, and ‘cost cutting – which may or may not be a sensible idea depending on what is its effect on value for money.

'The difference can be explained very easily with an analogy that is almost exact for the promotion of London. Suppose a travel agent abolishes their advertising budget. That is definitely ‘cost cutting. But it is terrible ‘value for money – because six months later they find out they have lost far more money than they saved because they no longer have any customers.

'The economics of the promotion of London abroad are clear. The grant from the GLA group to Visit London, the citys tourism agency was before the present administration cut it, slightly over £15 million a year. In 2006, the last year for which I had figures to hand, the increase in tourist spending in London was over £600 million. Certainly not all that increase was due to Visit Londons marketing , but as London was gaining market share in an industry where there is a natural tendency for every destination to lose market share, as each year there are more places to visit, some of it certainly was.

'Studies of the return on investment in tourist marketing campaigns for London show value for money of over 20 to 1 – that is for every £1 spent £20 is gained.

'Regarding inward investment, studies by the independent economics consultancy DTZ show that, because inward investment is concentrated in industries with far higher than average value added, every job created by a foreign company in London adds over £100,000 to Londons economy – which then goes into Londons shops, theatres, and therefore in creating other jobs as well.

'As for CJCJCs argument that ‘I think most holidaymakers around the world are perfectly well aware of which currencies are strong or weak at any particular time well that certainly shows that it was a mistake to create the advertising industry – heaven knows why companies pay such money for advertising campaigns. You might as well as say ‘well everyone knows the price and value at Tesco compared to Sainsburys so Tesco is making a mistake advertising. Better that Tesco should stop advertising. Try that and see what happens to Tescos sales.

'No, the point is that comparatively few people, and the world tourism market is beginning to be numbered in billions of people and inward investment flows in trillions of pounds, knows the relative attractions of London, or that it can be visited currently at lower prices than usual because of the decline in the pounds exchange rate, compared to other destinations that are engaged in heavy promotion because they understand how effective it is – such as New York, or India, or Paris.

'The present administration has cut £6.5 million a year out of the budget for the promotion of London – or almost a third. Yes, that is genuinely ‘cost cutting. But it is absolutely appalling value for money because the loss to Londons economy will be tens, very possibly hundreds of millions, of pounds.

'In response to Dave Hill – yes I openly state I am partisan. London built one of the finest marketing machines in the world which was deeply envied and admired by other cities. It has been seriously damaged, and in major part demolished, by the present administration - which will lose many tens of millions of pounds for London as many people in the business community are fully award.

'All arguments are, in reality, openly or implicitly partisan. The point is whether they are right or not. Those who have attempted to defend the cuts in the budgets for promoting London abroad have not produced a single argument that shows these cuts are anything other than extremely bad value for money indeed.'

Comments

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I totally agree that cutting down the tourism budget is not a good idea. In fact, if the industry is to survive or bring in more benefits in the future, this is the time to inject some more cash to cushion or handle the industry's downturn effects.